(This article appeared previously on MarketWatch.)
The evidence is mounting. Maybe, just maybe, you need to hire a financial adviser if you want to ever have a large nest egg or the right type of retirement accounts or perhaps just peace of mind.
Trust me, I’m no shill for financial advisers. But three points of data — as some journalists are fond of noting — do make for a trend. Consider:
1. Dalbar recently published a report suggesting that do-it-yourself investors aren’t doing so well when it comes to managing their own money. (In the interest of full and fair disclosure, I was employed by Dalbar when it first published its report, the “Quantitative Analysis of Investor Behavior,” some 20 years ago. The report has shown since it was first conducted in 1994 that investors lag the mutual funds they buy, with seemingly every move working against them.)
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2. Dan Heath, co-author of Decisive, said recently at the Investment Management Consultants Association conference that advisers can help retirees and investors avoid bad decisions. His reasoning is that advisers provide a buffer to an investor’s emotional reactions to the swings in the markets. The advisers help investors stay the course when emotions might suggest otherwise.
In one study, Cummings discovered that greater cognitive ability and having a financial planner are both positively related to Roth IRA ownership and to earlier Roth IRA adoption. And in his other study, Cummings looked at the effect that financial advisers have on actual wealth retention and consumption decisions among adults age 60 and older. And what he found is that “using a financial adviser is significant and positively related to subsequent net worth, especially on net worth values more than a decade after initially reporting the use of professional financial advice.”
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So, for instance, the mean net worth of those surveyed who were 60 years old in 1993 and still alive in 2008 and who had an adviser rose from $400,000 in 1993 to slightly more than $500,000 by 2008. By contrast, the mean net worth of those who didn’t have a financial adviser was mostly flat at around $200,000.
“There was a statistically significant difference,” said Cummings in an interview. “And the big takeaway is that the significance is greater when you are looking at differences 10 years out.”
In addition, having a financial adviser is positively associated with current and subsequent investment returns, and the large driver of the difference in returns between the have-an-adviser and the don’t-haves comes from differences in portfolio allocations
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Specifically, Cummings and his co-authors found that having a financial adviser is associated with a greater allocation to equities. “A lot of older adults sit in CDs and cash. And so a big value that financial advisers can have is to help them invest in the market so they can get those market returns. Having at least some allocation to equities could be one of the values that a financial adviser can have,” said Cummings.
“Taken together, these results provide evidence that financial advisers provide financial and nonfinancial benefits to individuals who use their services,” wrote Cummings. “Frequently, the quantifiable benefits of their services may only be realized when considering long-run financial outcomes.”
Manage Your Expectations
Now, if you have designs on hiring an adviser or even if you have one already, this means that it’s an in-for-a-penny, in-for-a-pound sort of exercise. Or put another way: You’ll need to manage your expectations about what an adviser can or can’t do in the short term.
You may not realize the full qualitative and quantitative benefits of having an adviser for at least a decade, according to Cummings.
In essence, you’ve got to be committed to your adviser. “Three or four years is not really enough time to assess whether (the adviser) has had a positive impact,” said Cummings. “You’ve got to look 10 years down the road to see if they really have an impact.”
This isn’t to say, however, that your adviser gets a free ride for 10 years. You’ll still have to measure, perhaps even yearly, the degree to which your adviser is meeting your investment and other objectives, including, for many, how well you can sleep at night.
You don’t want to wait 10 years and then ask whether you could have done better on your own. “Decide along the way what is the value (you’ve) received and is that value worth it,” said Cummings
Can You Sleep at Night?
To be fair, you’ll never really know whether you could have done a better job on your own versus with an adviser. But Cummings said one shouldn’t base the decision to hire, have or fire an adviser based only their investment performance and returns.
“We get too caught up in measuring the value of an adviser on their quantifiable benefits,” said Cummings. “I think the real benefit of having a financial adviser are the qualitative factors. The fact that they are helping you sleep better at night. You can’t put a dollar value on that. If you have greater confidence in your retirement and being able to succeed in your retirement comfortably, what’s the value in that? It’s hard to quantify that.”
Cummings recommends using the sleep-at-night or peace-of-mind
yardstick in addition to investment performance to gauge whether to hire, retain or fire an adviser. In other words, you might be hiring less an investment manager and more a sounding board or better yet a decision-making partner.
To be sure, if an adviser isn’t meeting your investment objectives or isn't servicing your account to your satisfaction,you might consider switching advisers
. Ultimately, you have to determine the metrics by which you will evaluate your adviser’s performance. And one metric to include and evaluate would be whether the adviser is helping you invest appropriately given your risk/return profile. “That might be a better measuring stick,” he said.
The other takeaway from Cummings’ research is this: When hiring an adviser or evaluating your current adviser, make sure you’re on the same page. Do you understand your adviser’s value proposition and investment strategy? And does your adviser understand what you want and need? And do those things mesh?
Conflicts of Interest to Worry About
Now just to be clear, there are some things retirees and investors do want to worry about when hiring and/or having an adviser.
Consider: Cummings once thought that an adviser can help investors optimally spend their wealth in retirement. “But there’s a conflict of interest that we don’t focus on,” he said. “If the adviser is compensated as a percentage of assets under management, they have a motivation to keep you from spending your wealth. But also, they have a motivation to keep you from running out of money. They would rather have you die with lots of money than to die broke. Because if you outlive your assets then they are in big trouble.”
And that’s a delicate line that advisers have to walk, and that you have to be aware of.
Now Cummings isn’t necessarily advocating that each and every investor hire an adviser. Rather, it’s for those who don’t have the time or inclination or knowledge to do it on their own.
“I can change the oil in my car,” he said. “Do I want to? No. Either I don’t have the time or I don’t want to get myself all dirty underneath the bottom of a car.”
Cummings said one benefit of having someone else change your oil is that this person might spot other problems with your car. “They have a lot more expertise about the car so I’m getting some ancillary benefits besides just the oil change,” he said. “They can notice problems that I wouldn’t be able to notice because of their expertise.” And therein lies part of the rationale for hiring an adviser.
Cummings also said it might make sense to have a team of advisers in place — a CPA, a lawyer, even another investment adviser — who can all evaluate the advice and performance of your adviser.
“There might be some merit to that,” said Cummings. “It’s something that we need to be thinking of: Should you diversify financial advisers?”
Robert Powell is a MarketWatch Retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.
This article is reprinted with permission from MarketWatch.com. © 2015 Dow, Jones & Co., Inc. All Rights Reserved.